Research from Commonwealth and BlackRock’s Emergency Savings Initiative finds that adding emergency savings to retirement savings via an in-plan, after-tax account helps individuals save for emergencies and encourages participation in retirement savings.
Offering “in-plan” emergency savings accounts can boost retirement plan participation rates.
Not to mention retirement savings nor profits, productivity, and impact, retention, recruiting, and wellness.
Emergency savings is having a moment at workplaces nationwide.
According to the seventh annual Employee Benefit Research Institute (EBRI) Financial Wellbeing Employer Survey:
“While $1,000 penalty-free withdrawals from retirement accounts — allowed through recently passed legislation — was the emergency savings benefit offered the least (21 percent), it was the benefit with the highest share of planned implementation within the next year or two (43 percent).”
Wow.
The benefit with the highest share of planned implementation.
Emergency savings benefits are on the march.
The dramatic transformation afoot is a result of the top financial stressor among workers shifting to a lack of emergency savings and two optional provisions in the historic retirement savings reform legislation SECURE 2.0:
- Employers, or plan sponsors, may now implement a pension-linked emergency savings account (PLESA) capped at $2,500 as part of their retirement plan (“in-plan” emergency savings).
- Employees may now withdraw up to $1,000 once a year (with a three-year repayment window) from their retirement account for unforeseeable or immediate financial needs.
2024 was the first year defined contribution plan sponsors could implement the emergency savings plansunder Secure 2.0.
So if you’re an employer considering whether to introduce an emergency savings benefit, there are a few things to know.
Most notably, the early feedback from workers is positive about both options BUT with a clear preference for the “in-plan” PLESA option.
Implementing emergency savings accounts: 3 things to know
1. Implementing emergency savings accounts can boost retirement plan participation and retirement savings rates.
Research from Commonwealth and BlackRock’s Emergency Savings Initiative finds that adding emergency savings to retirement savings via an in-plan, after-tax account helps individuals save for emergencies and encourages participation in retirement savings.
And Commonwealth’s case study with UPS and Voya shows retirement plan participation jumping by 39%, overall assets by 25%, with almost $10M in new savings, during the first year emergency savings was offered.
However, what’s most striking is that people without emergency savings are 13 times more likely to take a hardship withdrawal from long-term savings accounts than those with adequate emergency savings, per BlackRock.
Meanwhile, a survey conducted by Aspen Institute’s Financial Security Program, The Defined Contribution Institutional Investment Association, Morningstar, and NORC at the University of Chicago, suggests $1,000+ in emergency savings cuts in half the likelihood of workers withdrawing from their retirement accounts during an economic crisis.
So the data are clear: offering emergency savings benefits is one way for employers to boost retirement plan participation rates, enhance worker financial security, and strengthen your organizations.
2. Workers favor in-plan emergency savings benefits (for now).
Commonwealth finds a clear preference for the $2,500 “in-plan” emergency savings option, although respondents reacted positively to both the $1,000 withdrawal option and the $2,500 PLESA option:
“Reasons cited for this preference included an ingrained belief that retirement funds should not be withdrawn early, the notion that $1,000 is not sufficient to cover many emergency situations, and ease of setup and access to the PLESA for employees.”
Additional data in in-plans’ favor: AARP finds that saving for emergencies can increase wealth and that accumulating $2,500ish in savings significantly reduces the likelihood of experiencing financial hardships, for years.
3. Emergency savings auto enrollment and employer matching contributions enable workers to save for emergencies and retirement.
Defined contribution plan sponsors can automatically enroll employees into the emergency savings account to make post-tax contributions at up to 3% of their paycheck.
Research from Nest Insight finds emergency savings participation rates of workers jumped from 1% to 47% and from 16% to 71% after introducing auto enrollment, in two cases.
Workers who contribute to the PLESA emergency savings account are eligible for existing employer matching contributions to their pre-tax retirement account.
The employer matching contributions eliminate the toxic choice between saving for emergencies and saving for retirement that low- and moderate-income workers, especially, are often forced to make.
Emergency Savings Accounts: Path Forward
As the Bipartisan Policy Center puts it: “Congress will soon have opportunities to take practical steps to enhance emergency savings solutions by simplifying pension-linked emergency savings accounts (PLESAs) created by the SECURE 2.0 Act and enabling out-of-plan accounts to adopt automatic enrollment features.”
In the meantime, defined contribution plan sponsors can look to “in-plan” emergency savings, workers’ preferred option, to boost retirement plan participation rates, profits, productivity, and impact, now.
Talk to TrustPlus about emergency savings accounts and delivering to your organization the benefits of a financially healthy workforce.
